KeyStone’s Stock Talk Show, Episode 246.
It’s great to be back this week. We kick off the show with a look at last weeks’ pole and I hit the viewer mailbag to answer a question on Colabor Group Inc. (GCL:TSX), distributor of food and related products into foodservice, institutional, and retail channels within Quebec, Canada. The viewer asks if this potential turnaround story has value. Aaron answers a viewer question on AltaGas (ALA:TSX), a North American infrastructure company that connects customers and markets to reliable sources of energy. Aaron let’s you know if AltaGas, which pays a 4.1% dividend is an Energy Infrastructure business you should own. Brett answers multiple viewer questions on Super Micro Computer (SMCI:NASDAQ), a provider of application-optimized high-performance server and storage solutions. The stock is up 283% year-to-date and 965% over the past year – Brett let’s you know if the gains are justifiable and can continue. And last but not least, in the meatiest section of the show, Brennan answers a viewer question on Maple Leaf Foods Inc. (MFI:TSX), which produces packages food products globally, including prepared meats, ready-to-cook and ready-to-serve meals, snack kits, fresh pork and poultry, and plant protein products. The viewer notes the stock seems to always be in the penalty box and asks if it can every get out!
Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett and Brennan.
Colabor Group Inc. (GCL:TSX)
| COMPANY DATA | |
| Symbol | GCL:TSX |
| Stock Price | $1.19 |
| Market Cap | $121.36 M |
| Yield | nil |
What does Colabor do?
Colabor is a broadline distributor of food and related products into foodservice, institutional, and retail channels within Quebec, Canada. Colabor is also a wholesaler to smaller distributors in the province.
Historically Revenue & Gross Profit.
Revenues dropped over the past 10 years from $1.4 billion in 2014 to $659.1 million in 2023. Gross profit has improved significantly from $30.1 million to $119 million over the same period.
EPS Last 5-Years & TTM.
EPS has been spottier over the past 5 years.
Recent quarterly and year end numbers: Q4 & 2023 Highlights:
2023 annual growth was a solid 15%.
1.6% quarterly growth – albeit the 2022 period included 1 more weak, so growth would have been better (5.8% on a like to like basis).
Adj. EBITDA margin improved, but is a low 5.9%.
Operating Cash flow was up 50%.
BALANCE SHEET.
Net debt / adjusted EBITDA less lease liability payments for the last four quarters – we would not like to see this ratio increase significantly given the fact the company has a relatively low margin profile.
Valuations:
Valuations:
EV/EBITDA (TTM): 7.4x.
EV/EBITDA (FY 2024e): 6.8x
PE (TTM): 23.8x
In terms of EV/EBITDA multiple, the company is trading slightly below its 5 year average, but not significantly so to other lower margin distribution based businesses we track to make it a buy, particularly given the leverage on the balance sheet.
Conclusion:
New Facility Completion: GCL just completed the build and startup of the new Wholesale + Distribution facility in late-2023 – Capex: ~$15 million. Estimates to new capacity supports a ~2x top line for GCL over time.
Intriguing if organic growth via new business can ramp-up in the new facility, but the current valuations, low margin business, and leverage make GCL just fair value at present.
YSOT Maple Leaf Foods (MFI:TSX)
Price: $23.12
Market Cap: $2.8 Billion
Yield: 3.8%
Company Description:
Maple Leaf Foods Inc. produces packages food products globally, including prepared meats, redy-to-cook and ready-to-serve meals, snack kits, fresh pork and poultry, and plant protein products.
Slide #3
Since 2018, the stock really hasn’t done too much…
The last time we covered Maple Leaf on the podcast was as a dog of the week in August of 2022 after the stock was down 17% after releasing weak Q2 2022.
Aaron noted at that time that analyst estimates for 2023 was $1.11 Adjusted EPS but as Aaron mentioned on the podcast, we should take this estimate with a grain of salt.
Slide #4
Maple’s revenue in Q4 2023 was up 0.6% to $1.19 Billion primarily driven by the company’s Meat Protein Group Sales which were up 0.8%.
Adjusted EBITDA was up 117% to $120.2 million with the Adj. EBITDA margin increasing to 10.4% from just 4.7% in Q4 2022.
Adjusted EPS was $0.08 per share, up from a loss of $(0.28) in Q4 2022. Note that in 2022 Analysts were anticipating Adjusted EPS of over $1.00 in FY2023 like Aaron noted. Well, that was far off given the company only did $0.09 per share.
Maple Leaf currently has Net Debt of $1.75 Billion and a trailing net debt to EBITDA multiple of 4.1x. And for contect, the company’s debt is primarily variable rate with a weighted average interest rate of 8.2% as of December 31, 2023. But about 20% of the floating rate debt has been fixed at 4.7% with an interest rate swap. Management noted in their press release that they are currently focused on deleveraging.
Quickly looking at the valuations the stock trades at over 200x times trailing adjusted earnings, and with an EV/EBITDA of approximately 10.7 times and a price-to-cash flow multiple of approximately 16 times.
Slide #5
Looking at the company’s 2024 guidance, management anticipates low-to-mid single digit revenue growth, and is looking for Adjusted EBITDA margin expansion over 2023. This is supposed to be led by the normalization of the Meat Protein group’s Adjusted EBITDA margins to 14-16% (~10% in FY 2023).
Slide #6
The company has grown the dividend tremendously over the years, from $0.04 cents per share per quarter in 2011, now up to $0.22 per share per quarter in 2024.
Now the dividend currently does not look sustainable given the company’s depressed profitability. However, I am not going to declare that the dividend will be cut… when in fact the business just increased the last dividend by 4.8%. But we really need the company to get back into meaningful earnings before we have confidence, as even if we annualize the Q4 Adj. EPS of $0.08 cents, we are still left with a forward payout of 275%.
So we would really like to see profitability improve in 2024 for the dividend to become more sustainable.
And I give enough companies a hard time when they issue shares like its their day job, so here you can see Maple Leaf’s share count has actually been quite steady and declining since 2016 which is a good thing to see.
Slide #7
- At this point, Maple Leaf is really a turnaround story:
- Coming off of a difficult post-pandemic period by dislocated pork markets, inflation, disrupted supply chains, and a consumers increasingly under stress. MANAGEMENT is looking for the pork market to normalize in 2024, but this is very difficult to predict.
- Margins beginning to recover (Management expects to continue) with restored health of supply chain and increased pricing to catch up to inflation.
- Focused on Paying down debt and to be “more disciplined” on CapEx spending in 2024.
- As Aaron mentioned back in 2022 the company was finishing its London Poultry and Bacon Center which management believes will further be accretive to Adjusted EBITDA in 2024.
- Long term Maple Leaf has grown its Revenue with a CAGR of 5% from 2014-to-2023 and is guiding for similar growth in 2024. It currently trades at 16x cash flow and 12x EBITDA and pays out a nice yield of 3.8% (but high payout).
- Overall, I think Maple Leaf is a good company and someone could invest with a “contrarian approach” if they believe the company is in-fact on the otherside of its headwinds which will allow it to increase its profitability. But at this point I think it is really a “show me” story of replicating the margins in Q4 2023, further paying down its debt, and getting the payout ratio in a reasonable bound by increasing margins.
YSOT SMCI March 2024
1)
Super Micro Computer symbol SMCI on the Nasdaq is a provider of application-optimized high-performance server and storage solutions. The company develops and builds server solutions at scale with its Building Blocks Solutions. The company is trading at $1,085 a share and has a market cap of $61 billion. The company is trading up 283% year-to-date and 965% over the past year, a strong performance to say the least.
2)
Diving into the last quarter, Fiscal Q2 2024.
Net sales increased 103% to $3.66 billion from $1.8 billion. Gross profit increased to $564 million from $337 million a 67% increase.
3)
Gross margins, however, fell to 15.4% from 18.7%. So, the company is not seeing that gross margin uplift like Nvidia the leader of the AI hardware market. Unlike Nvidia or any other company that has seen this massive uptick in sales plus the increased margins which is a multiplicative impact, you see the opposite with Super Micro Computer. The company attributes the decrease in gross margin to product and customer mix partially offset by lower cost of goods sold and manufacturing efficiency. In the conference call the company elaborates saying it was to win new customers and remain competitive, in other words, they need to compete on price to acquire additional sales. Super Micro needs to compete on price as the product being server racks is not a product unique to them, as many manufacturers are combining the subsystems to create servers.
4) But continuing to move down the income statement, the company has increased its operating costs SG&A and R&D by 58% to $193 million, as sales and gross profit increased at a higher rate this implies higher economies of scale.
The result is an operating income of $371 million from $215 million a 73% increase. Moving down, net income increased 68% to $296 million from $176 million. Net margin came in at 8.1% compared to 9.8%. So the economies of scale is less impactful than the decreased margins on a sales-relative basis.
On a diluted per share basis the company had EPS of $5.10 compared to $3.14. Then on a non-GAAP basis, EPS was $5.59 compared to $3.43 with the only significant adjustment being share compensation.
5)
Shifting to the balance sheet it is strong, with a net cash position of $350 million, so no concerns there.
6)
For fiscal Q3 2024, the company is guiding sales of $3.7 billion to $4.1 billion and GAAP EPS of $4.79 to $5.64 a midpoint of $5.22 which would imply a sequential improvement of 2.3%. For the fiscal year, the company upped its previous guidance of $10 to $11 billion to revenue of $14.3 to $14.7 billion, a 38% increase from the midpoints. I will say they did smash the guidance for the last quarter
7)
Moving to valuation, SMCI trades at a whopping PE of 85 times, a price to sale of 6.6 times. These are not cheap. We can look at the historical average PE which is about 19.5 times, even when the recent figure moves that average up a few points. As well even on a forward basis for the yearly guidance price to sales is still 4.2 times and P/E if the net income margin is at 9% which is optimistic above last quarter, is still a PE of 47 times. To support this valuation you would need another 2 or 3 years of heightened growth with no cyclical downturns priced in.
8)
Concluding,
Super Micro Computer’s share price has surfed the AI wave but the company’s performance albeit benefitting from the AI push does not support the degree of increase. The company does not see improving gross margins in fact decreasing to win sales, meaning you are unlikely to see that huge expansion in net income margin, which then limits the growth of earnings. Yes, the share price should have increased and likely should have an above-historic average multiple given near-term growth potential but the premium baked into the price at this time is just too high.
